Budget 2012: An attempt has been made to cut the fiscal deficit, which is necessary for lower interest rates

Budget 2012 was presented against a backdrop of a tricky fiscal situation and concerns of a revival of domestic growth prospects.

Against a budgeted fiscal deficit 4.6% target for the current fiscal, the Budget now projects a revised fiscal deficit estimate at 5.9% of GDP: a slippage of the magnitude of Rs 1,092 billion vis-a-vis the budgeted FY2012 estimates.

Against this, the government targets a fiscal deficit at 5.1% of GDP in FY2013: a decline of Rs 83 billion from the revised FY2012 estimates. Interestingly, the FY2013 budgeted fiscal deficit estimates are still higher by roughly Rs 1,008 billion over the budgeted FY2012 estimates. Clearly, the road to fiscal consolidation still remains an arduous one and the crucial question is how prepared are we for pain.

The accompanying table provides a comparison of the fiscal deficit targets as enunciated in the FY13 Budget. Over the medium term, the government believes to bring down fiscal deficit further and has targeted a reduction in fiscal deficit to 4.5% by FY2014 and 3.9% by FY2015.

However, in the FY2012 Budget, the government had defined rolling targets for fiscal deficit at 4.1% for FY13, and 3.5% for FY14. In fact, in the FY11 Budget, the rolling targets for fiscal deficit were 4.8% for FY12 and 4.1% for FY13. Clearly, there is evidence of the government shifting the fiscal deficit goalposts in FY13 Budget (a closer look at the numbers reveals that the earlier target for FY12 budgeted estimates is now projected to be achieved in FY15).

Next, how feasible are the revenue, expenditure targets for FY13? The fiscal deficit target for FY13 is based on a projected buoyancy in nontax revenue - 32% budgeted growth in 2012-13 against a five-year compounded annual growth rate (CAGR) at 6.1% - basis Rs 40,000 crore spectrum proceeds in next fiscal.

Additionally, net tax revenue to Centre is projected to climb by 20.1% (five-year CAGR at 9.9%). Net tax revenue, in turn, is based on estimated buoyancy in indirect taxes (excise tax projected to grow by a sharp 29%, against a fiveyear CAGR at 5% and service taxes at 30.5% against a fiveyear CAGR at 16.7%). Overall, the implied revenue buoyancy of 1.4 is much higher than 0.8 in FY12RE.

As far as controlling expenditures are concerned, though the Budget targets containing the central subsidies under 2% of GDP in 2012-13, bringing them down from the current 2.4% will not be easy.

This is because implementation of food security Bill will alone amount to a minimum of 0.7% of GDP and could be as high as 1.5% of GDP (just after the Budget was announced, the government had put out an estimate of food subsidy Bill at Rs 1.12 lakh crore).

It is believed that the estimates of food subsidy may have a downward bias, as it does not include subsidy storage and transport, leakage costs, etc (food subsidy is projected to increase by only 3% in 2012-13, against a five-year CAGR at 22.1%).

Also, the budgeted figures for oil subsidy indicate a decline by about 36.4%, or Rs 24,901 crore. However, there has been no word on theproposed deregulation of the sector or an increase in diesel prices. It is hoped that the much-required deregulation of the petroleum sector is taken forward in the right earnest and this can happen though price increases over the next few months.

The gross market borrowings for the year 2011-12 have been revised upwards by 22% from Rs 4,171 billion (BE) to Rs 5,100 billion (RE). This figure is further expected to go up to Rs 5,696 billion in 2012-13. Such a high level of borrowing will continue to exert pressure on interest rates. Apart from dated securities, the government is also scheduled to borrow Rs 900 billion through treasury bills. However, the decrease in interest rates on EPF is an encouraging move.

The government has taken several measures to augment indirect taxes. The servicetax base has been increased by introducing a negative list. The list now contains 17 items, which implies that every other service would be taxed.

There is a proposal to raise the service tax rate to 12% from 10% earlier, bringing it to pre-crisis levels. The standard excise duty rate has been hiked to 12%. It had been reduced to 8% during the peak of the global financial crisis and, since then, the government has been rolling it back in stages.

The next couple of days will be crucial for the government to demonstrate sticking to its promise of fiscal consolidation as envisaged in the Budget. More importantly, any attempt to roll back railway fare hikes may be construed as a negative signal for the proposed deregulation of the oil sector.

The government has taken a bold stand of reducing deficits and it should be the endeavour for all us to move ahead. This will allow interest rates to come down. We need to spend on infrastructure, on social schemes that get directed to beneficiaries and strong fiscal reform is a great way to get us there. Continued focus on the Direct Taxes Code Bill and getting GST off the ground are also the priorities. Let us make a new beginning of consensus in economic reforms.